Today we update our Sector vs. Market Timing study, which illustrates the value of concentrating your portfolio in the strongest areas of the market.
Today we update our Sector vs. Market Timing study, which illustrates the value of concentrating your portfolio in the strongest areas of the market.
Thus far, 2026 has been a bit bumpy, but the S&P 500 (SPX) is up about ½ percent year-to-date (through 1/21). However, with the market coming off a 15%+ in 2025 after gaining more than 20% in 2023 and 2024, there are concerns about how much further the rally can go. Even if the market were to reverse course and finish the year in the red, there would almost certainly be areas of strength, as we typically see wide dispersion between the best-performing and worst-performing sectors regardless of whether the broad market is up or down. Throughout our study, from 1993 through 2025, the S&P 500 posted a negative calendar year return six times, but there were only two years – 2002 & 2008 – in which all of the Dow Jones sector indices finished the year in the red. In 2022, when the S&P was down nearly 20%, the Dow Jones US Oil & Gas Index (.DJUSET) was up more than 60%.
The Sector vs. Market Timing study can be a useful tool both for coaching clients to stay the course in a turbulent market, like the one we found ourselves in 2022, and for explaining intra-market dispersion and the value of relative strength strategies generally.
Dispersion refers to the performance difference between the best and worst performing assets and quantifies the opportunity available to tactical strategies. Relative strength-based strategies tend to offer excess return over their benchmarks more readily when the dispersion between the best and worst performers is very wide. The reason for this is straightforward - the more divergence that exists between the best and worst performers, the more potential value can be added by owning strong performing assets or sectors and avoiding the bad performers. When there is more dispersion, there is more potential for a tactical decision to produce a meaningful result. On the other hand, such strategies will tend to suffer or at least become muted when the dispersion is narrow. Taken to an extreme, if all investment possibilities were up the same amount each month and each year, tactical management would have no opportunity to add value via rotation. From 1993 through 2025, the calendar year dispersion between the best- and worst-performing broad DJ sector indices have ranged from a low of just over 25% in 2012 to a high of nearly 97% in 1999 and 2022, with an average of just under 45%. In most years, the sector dispersion has been greater than the total return of the S&P 500, meaning that there was potentially more to be gained from sector allocation than from deciding between the S&P and cash, as our study further illustrates.
Our study tracks the return of four hypothetical investors over 30+ years, from 1993 through 2025, the first investor who we’ll dub, "Mr. Buy and Hold” simply buys the S&P 500 Index and rides it up and down, making no movements at all in the portfolio. "Mr. Perfect Market Timer", our second investor, is assumed to be clairvoyant and is only invested during months in which the S&P 500 Index is up. In 2008, for example, this investor would have only been invested in April, May, August, and December, as those were the only positive months that year. In our view, this is about as "perfect" as any "market timer" could ever hope to be, and thus we feel this quantifies well the best-case scenario for market timing.
Our last two investors are both sector investors, one of whom, "Ms. Perfect Sector", knows each year what the best-performing sector will be for that year, and invests 100% of her portfolio in just that one sector. The fourth investor, "Mr. Worst Sector", is an unfortunate fellow, who perhaps just follows a favorite magazine cover and is on the wrong side of things every year. He manages to invest only in the single worst-performing sector.
As you might imagine, each of the investors has seen dramatically different results over the years from their initial investments of $10,000 back in 1993. At the end of 2025, Mr. Buy and Hold had a portfolio value of about $295,000 while Mr. Perfect Market Timer had a portfolio value of more than $47 million. Ms. Perfect Sector saw her portfolio swell to $163 million, all while poor Mr. Worst Sector's portfolio was worth only $268! Yes, you read that right - $268 from the starting point of $10,000.
So, it's easy, right? All you need to do is invest in the best-performing sector each year and simply walk away. Unfortunately, it is not that easy, nor are we advocating that you try to pick the best-performing sector and put all your eggs in one basket; rather, this is simply a powerful illustration of just how important incorporating a sector rotation plan can be into your overall portfolio strategy. It can also be an eye-opener for clients that the impact of buying the best sectors is even greater than that of being able to perfectly time the overall market.
We have numerous tools and indicators on our website that help guide you in the right sector direction from guided ETF models to DALI to sector bullish percent indicators. The premade NDW Group Matrix is a favorite of the analysts to keep an eye on each week. This RS matrix was the first one created at NDW many years ago, and it is comprised of all 40 of our NDW sectors, along with the S&P 500 Equal-Weighted Index (SPXEWI). Each sector is represented by an NDW Equal-Weighted Sector Index, which is constructed with roughly 20 to 25 names from each group. The RS matrix concept summarizes a big arm-wrestling match between all 40 of these NDW sector indexes. Those sectors at the top of the matrix possess superior relative strength compared to the others on the list. Typically, you then want to focus your attention on those sectors toward the top of the matrix, while underweighting those found at the bottom. Currently, precious metals, non-ferrous metals, electronics, aerospace, and semiconductors occupy the top five spots in the matrix, indicating that these are areas on which we should focus our domestic equity exposure.
NDW Group Matrix
(as of 1/21/26)
